Believe it or not, April is historically the second best month of the year for stocks, second only to the month of December. However, after limping out of March, it's going to be a tall task for stocks to gain traction. That said, the S&P 500 eked out a 0.4% gain for the quarter that showed nine consecutive quarters of positive results- the best streak in 17 years. Nevertheless, everything has stalled, and with the market closed on Friday, the jobs report will not be able to move the needle, even if it is deemed good news.
New Issues Grind to a Halt
Remember last year when the initial public offering (IPO) market was sizzling? It was being called the first sign of a market meltdown with constant daily comparisons to the crash of 2000. Well, the IPO market did not extinguish the rally; it just ran out of gas and now exists on fumes.
- 34 deals for $5.4 billion in the first quarter
- 83 deals for $20.8 billion in the second quarter
- 60 deals for $37.6 billion in the third quarter
So, to the rescue are two IPOs that could claim cult status. By now, every football fan knows “Go Daddy” for its racy television ads. Along the way, the company boosts 12 million customers and manages 54 million domains.
Also, going public is the peer-to-peer site “Etsy” that specializes in handmade vintage items and supplies. There has been controversy within this company, along with a number of changes with management, and from what I understand; they are accepting some factory-made goods.
Well, neither company is profitable, but that’s not stopping them from fetching the high-end of the IPO range. While I don't expect disaster from either of these companies, I wouldn't chase them. If they doubled on the first day of trading, that would be a sign of froth that investors have held in check throughout the rally.
The Bigger Issue- Freefalling Earnings Estimates
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Consensus earnings estimates for the first and second quarter continue to drift lower and lower. Right now, the Street is looking for a decline of 4.6%. Coming into the year, the consensus saw a 4.2% growth. Moreover, all ten sectors are looking at lower growth rates and thus far, 85 companies have reported and offered negative guidance against only 15 with positive guidance.
- Current S&P 500 PE 16.7
- Five- Year Average PE 13.7
While the price-earnings (PE) ratio is nowhere near traditional top with estimates dropping like a rock, it becomes a bigger concern. Note: On an individual basis, the PE ratio doesn't matter as much as organic growth, market share gains, and margin expansion.
Wednesday’s Session
Equity futures were under pressure all morning, although putting a finger on the early action was difficult. Manufacturing data for the Eurozone and China came in better than expected. The weakness is justified now, however, after the ADP employment report came in significantly below consensus.
At 189,000 the report paints a picture of an economy adrift, not one bulging at the seams ready to come on like a galloping thoroughbred. Consensus was 225,000, so not only was this a big miss, but the first 'one' handle since January 2014.
Keep in mind, the difference between ADP’s and Bureau of Labor Statistics’ employment reports (the government number will be out this Friday) is on average 23,000, so at 248,000 consensus it doesn't bode well. If there's a similar miss, look for serious pressure at the Fed to keep its powder dry and cheap money available.
I would like to point out how small businesses continue to step up to the plate. While the headline number is lower each month, this year it's the exact opposite for small business up sequentially.
- Very Small (1-19) 57,000 jobs
- Small (20-49) 51,000 jobs
ADP Overall Jobs
ADP Small Business Jobs
This is a confusing time for direction, which is fine. Our strategy has been to compile a list of buys that we'd pounce on in the event of a dip or chase if there's a clear breakout.
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